Debt Collection

Debt Collection Practices in Florida

When it appears that a debtor will default on a loan, a creditor must first determine whether their loan to the debtor was of a consumer or a commercial nature. This categorization of the debt is critical with regard to what debt collection practices a creditor can legally implement to recoup the money loaned to the debtor. This is due to the fact that federal law does not apply to commercial debts and Florida law regulates the collection of consumer and commercial debts under two separate statutes.

To determine the type of debt that is sought to be collected, Florida provides statutory definitions for both consumer and commercial debt. Consumer debt is defined as debt that is “primarily for personal, family, or household purposes…” § 559.55(6), Fla. Stat. (2016). In contrast, commercial debt is defined as debt that is “primarily for commercial purposes and not primarily for personal, family, or household purposes…” § 559.543(1), Fla. Stat. (2016).

With regard to federal regulation of debt collection practices, Congress passed the Fair Debt Collection Practices Act (FDCPA) in 1977. Congress announced that the purpose of this act was to “eliminate the abusive debt collection practices by debt collectors…and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. § 1692(e) (2016). However, Congress only defined the regulated debts to include those that “are primarily for personal, family, or household purposes…” 15 U.S.C. § 1692a(5) (2016). Thus, in effect, Congress left commercial debts unregulated under the FDCPA.

Because there is significant overlap between State and Federal regulation of consumer debt collection practices, the FDCPA provides for the superiority of Federal law, over similar State law, whenever the two are inconsistent. 15 U.S.C. §1692n (2016). However, the FDCPA also provides that “a State law is not inconsistent with this subchapter if the protection such law affords any consumer is greater than the protection provided by this subchapter.” 15 U.S.C. §1692n (2016). Thus, in any conflict between State law and Federal law, pertaining to consumer debt collection practices, the body of law that provides the consumer with greater protection will apply. Similarly, the Florida consumer debt statute provides that it is to be applied “in addition to the requirements and regulations of the federal act” and “in the event of any inconsistency between any provision of this part and any provision of the federal act, the provision which is more protective of the consumer or debtor shall prevail.” § 559.552, Fla. Stat. (2016).

As stated in the federal regulations, the regulations were put in place to curb the “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices”, as these practices “contribute to the number of personal bankruptcies, to marital instability and invasions of individual privacy.” 15 U.S.C. §1692(a) (2016). Thus, the FDCPA provides the affected consumer with a civil action when a debt collector is found to have committed any abusive, deceptive, or unfair debt collection practices. 15 U.S.C. §1692k (2016). The FDCPA provides that a debt collector found to have violated the act will be liable to the affected individual debtor for actual damages, statutory damages of up to $1000, possible punitive damages, and reasonable attorney’s fees. 15 U.S.C. §1692k(a)(1)-(3) (2016). In the event that a debt collector is facing a class action, that debt collector could be liable for up $500,000 plus reasonable attorney’s fees. 15 U.S.C. §1692k(a)(2), (3) (2016).

With regard to consumer debt collection regulations and penalties, Florida’s statute is stricter on debt collectors than its federal counterpart. Firstly, Florida requires that consumer collection agencies register with the State and continually maintain a valid registration thereafter, unless they meet one of the many exceptions listed. § 559.553(1), Fla. Stat. (2016). Significant registration exceptions include, the original creditor, a member of The Florida Bar, licensed real estate brokers, FDIC-insured institutions, along with several others. § 559.553(3), Fla. Stat. (2016). Florida defines these consumer collections agencies to consist of “any debt collector or business entity engaged in the business of soliciting consumer debts for collection or of collecting consumer debts, which the debt or business is not expressly exempted for…” § 559.55(3), Fla. Stat. (2016). The Florida statute provides consumers with the same civil remedies provided for in the FDCPA mentioned above. § 559.77, Fla. Stat. (2016). However, unlike the FDCPA, in Florida, nonexempt parties that engage in collecting consumer debts, without the proper registration, are subject to first degree misdemeanor criminal charges. § 559.785, Fla. Stat. (2016). Thus, it is very important for debt collection agencies to ensure that their collection activities meet the statutory requirements.

The debt collection practices for creditors looking to recoup commercial debts are much less tightly regulated than those methods allowable for collecting consumer debts. As mentioned above, this is due to the fact that commercial debt collection is not federally regulated. Additionally, this comparative lack of regulation reflects the underlying principle that business debtors are more sophisticated parties than consumer debtors and thus, can stand up for themselves in the face of debt collectors. Like the consumer debt collections statute, the Florida Commercial Collection Practices Act (FCCPA) also requires commercial debt collectors to register with the State. § 559.545, Fla. Stat. (2016). While the FCCPA does not specifically define offensive debt collection practices, unlike its consumer oriented counterpart, it states that the legislature’s intent in promulgating the act was to “prevent unlawful and fraudulent commercial collection activities” because such activities are not covered by the FDCPA or the consumer collections Florida statute. § 559.542, Fla. Stat. (2016). Furthermore, the FCCPA does not provide for a statutory cause of action for businesses to utilize against their unlawful creditors. Thus, business creditors are left to ordinary civil causes of action, which causes contract terms to be of paramount importance. However, the FCCPA provides that it is a felony to engage in commercial collection agency activities without proper registration or exemption from registration. § 559.548(1), Fla. Stat. (2016).

As mentioned above, the lack of formalities provided for, under Florida law, for commercial debt collection practices puts overarching importance on the contract that a debtor and creditor have entered into. Here, it is important for a commercial creditor to form a contract with the debtor business that ensures maximum creditor security. This contract should include favorable creditor provisions, such as securing the loan with some sort of collateral or lien and simply including a personal guarantee. This will often be fairly simple to negotiate, as the creditor will have the advantage of leverage over the debtor business, which often needs cash fast. In the event of a debtor business defaulting on a loan, the contract terms will eventually guide the litigation proceeding and, if properly drafted, will lead to swift creditor recovery.

When making commercial loans to businesses, the most important creditor security measure is to include a personal guarantee within the loan contract. This is due to the fact that incorporated businesses, and most forms of unincorporated business entities, shield their owners from personal liability for their business’ debts. This is due to the statutory systems that recognizes these types of businesses as, essentially, a person separate from their actual human owners. Thus, for example, if a creditor loans money to a LLC, without having a single member of the LLC sign a personal guarantee, and that LLC becomes insolvent, the creditor would have no recourse against the members of the LLC personally. In this disastrous situation, the creditor would have to stand in line with the LLC’s other creditors and hope to be repaid from the liquidation of the LLC’s assets, which is usually doubtful. Additionally, all the while, the LLC members’ personal assets would all be safe from the creditor that their former business owes money to.

However, it is very easy for a commercial creditor to avoid the situation described above through the inclusion of a personal guarantee in their loan contract with the owner or owners of the business entity debtor. As implied by its name, what a personal guarantee does is have the person signing the contract bind themselves to the legal obligation to pay for their business’ debt, in the event that their business is unable to pay back the debt through business assets. Thus, after signing a personal guarantee, the person who has signed the contract on behalf of their business entity has opened their personal assets up to the creditor, if the creditor must look past the assets of an insolvent business to recover their loan.

While it is very difficult for a creditor to recover their commercial debt from a debtor’s personal assets, without the inclusion of a personal guarantee in the loan contract, it is not impossible. This is because there is a common law doctrine that exists that may allow a creditor to reach these personal assets under certain, rare circumstances. This doctrine is referred to as “piercing the corporate veil,” yet it also applies to other unincorporated business entities. In Florida, piercing the corporate veil is extremely difficult. This is due to the fact that the Florida Supreme Court has held that the corporate veil should only be pierced when the creditor proves that the corporation was organized or used to mislead debtors or to commit fraud upon them. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1120 (Fla. 1984). Thus, a Floridian creditor must withstand a very high burden of proof to successfully pierce a Floridian corporate liability shield.

After it becomes clear that a commercial debtor appears to be defaulting on its debt, there comes the question of what to do next. Firstly, all attempts to avoid litigation should be implemented, as certain legal tactics may yield cheaper collection. These tactics should be employed to get the debtor’s attention in a non-hostile manner. This process often begins with a simple series of phone calls. The creditor should enlist the help of their lawyer and have their lawyer begin to call the debtor in a professional manner. If this process does not work, then the creditor should have their lawyer draft demand letters to be sent to the debtor. A demand letter simply states that the debtor is in breach of contract by not paying their overdue debt and that, while the creditor is prepared to proceed with formal legal action, they would rather avoid it. The demand letter should also give the debtor a reasonable deadline, before which, the debtor should submit payment to the creditor, or face legal action.

If the informal tactics discussed above fail, the creditor must proceed with formal litigation. This will hopefully lead to a final judgment in the creditor’s favor. Once this final judgment is obtained, the process of actually collecting the awarded judgment begins. The first step in this process is to certify and record the judgment. This process consists of receiving an official copy of the judgment from the court where the case was heard and having the clerk of that court record the judgment, which makes it public record. Under Florida law, a properly recorded final judgment allows the creditor to recover their debt from the debtor’s property through lien, garnishment, levy, or other remedies. § 55.10(1), Fla. Stat. (2016).

After the recording of the final judgment, the creditor must locate the debtor’s eligible assets. This process can be complicated, as debtors might have employed mechanisms to hide their money and statutes keep certain assets out of creditors’ reach. However, a judgment creditor can employ the help of the court to pry this information from the debtor. This can be done through the legal methods of interrogatories, depositions, or hearings. These tactics all center on the asking of the debtor, under oath, about the existence, location and form of their assets, which opens the debtor up to the criminal charge of perjury, if they are found to have answered dishonestly.

Additionally, the creditor may encounter the issue of a debtor having a lot of money tied up in shell LLCs or corporations, making the personal guarantee by the debtor useless. This money is seemingly shielded from the creditor through the fact that these business entities are considered separate legal entities from their owners. However, there is also a common law doctrine that may be applied in these situations titled “reverse piercing of the corporate veil”. As the name implies, it is the inverse of the legal doctrine, “piercing the corporate veil,” discussed above. Here, instead of getting past the corporate shield of liability to get to the corporate owner’s personal assets, the creditor seeks to satisfy its judgement by reaching the assets possessed by corporations that are owned by the debtor. Florida courts have defined this doctrine to mean that when “a controlling shareholder organized or used a corporation to deceive or defraud his personal creditors, the separate corporate existence will be disregarded and the corporation and the shareholder will be treated as one and the same.” Estudios, Proyectos e Inversiones de Centro America, S.A. (EPICA) v. Swiss Bank Corp S.A., 507 So. 2d 1119, 1120-21, (Fla. 3d DCA 1987). This would mean that the shell entity’s assets could be included in the personal assets of the debtor. However, due to the difficulty of applying this doctrine, debts should always primarily be sought to be satisfied out of the debtor’s personal assets, before resulting to this argument.

Once the debtor’s assets are identified, the creditor’s lawyer must weigh the best legal actions to take to recover the creditor’s judgment from these assets. Choosing which method of recovery to employ largely depends upon the forms of the debtor’s assets. If the debtor only maintains valuable real property, then a lien may be the creditor’s only option. If the debtor maintains valuable personal property, then a levy might be the creditor’s easiest option. Furthermore, when a debtor is employed at the time of the judgment against them, the creditor may be able to assert a wage garnishment against the debtor. These methods will now be discussed in more detail.

As mentioned above, when the debtor’s only assets of value are real property, a lien might be the creditor’s only chance of eventually recovering their judgment. A lien is, essentially, an interest in the debtor’s real property that is equal to the amount of the judgment against the debtor, which will become payable to the creditor once that property is sold or another agreement is reached. In Florida, a judgment lien is acquired by “filing a judgement lien certificate…with the Department of State after the judgement has become final…” § 55.202(2), Fla. Stat. (2016). The required content of a valid judgement lien certificate is laid out in section 55.203, Florida Statutes (2016). However, the satisfaction of a judgment through a judgment lien should always be the creditor’s last option, as the creditor will not receive any repayment until the property subject to the lien is sold. Thus, if the property subject to the lien is never sold, the creditor could be out luck.

With the shortcomings of judgment liens already discussed, it is much safer for a creditor to seek satisfaction of their judgement through remedies against personal, as opposed to real, property. This includes levies, attachments, and garnishments. The optimal assets for a creditor to go after are usually bank accounts or wages. To initiate these remedies, the creditor must obtain a writ of execution or other court orders.

To briefly describe the effect of some of the available remedies, the effect of a levy is that the judge provides a writ of execution to law enforcement that allows the creditor to receive payment directly from the debtor’s bank account or other valuable personal property. § 76.14, Fla. Stat. (2016). An attachment is when the judge provides a writ of attachment to law enforcement that allows law enforcement to directly seize certain assets that belong to the debtor. § 76.01, Fla. Stat. (2016). To enforce these court orders, Florida law states it is the duty of a sheriff to levy on specific property whenever a writ, issuing out of any court of the state, is delivered to the sheriff. § 30.30(1), Fla. Stat. (2016).

As opposed to the other types of remedies mentioned, a garnishment is the ability of a creditor to collect the debtor’s future wages directly from the debtor’s employer or others that owe the debtor money. § 77.0305, Fla. Stat. (2016). In order to obtain a writ of garnishment, the creditor must file a motion for garnishment that states the amount of the judgment that was awarded to the creditor, which then must be granted by the judge. § 77.03, Fla. Stat. (2016). Once the judge issues the writ of garnishment, Florida law commands that these third parties pay the money owed to the debtor directly to the creditor. § 77.01, Fla. Stat. (2016). This could be an attractive debt collection remedy, as the unreliable debtor is cut out of the payment process entirely.

In conclusion, debt collection can be a complicated and frustrating process. Different collection rules may apply depending on the classification of the debt for which repayment is sought. Some of the legal regulations discussed may come into play prior to the commencement of formal legal action. Furthermore, depending on the financial situation of the debtor, the remedies that should be implemented by the creditor can change. Thus, for a multitude of reasons, it is very important to seek legal advice before even contacting the person or entity that owes you money!